Notes 11-20

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11. TAXATION

  2008 2007
(a) Analysis of tax charge for the year Results for the year before exceptional items and certain re-measurements
£m
Exceptional items and certain re-measurements
£m
Results for the year
£m
Results for the year before exceptional items and certain re-measurements
£m
Exceptional items and certain re-measurements
£m
Results for the year
£m
  1. The Finance Act 2008 changed the rules concerning loss relief on decommissioning costs and, as a result of this change, the current year deferred tax charge is stated net of a £55 million credit in respect of previously unrecognised deferred tax assets.
  2. The effect of the decrease of 2% to the standard rate of UK corporation tax from 1 April 2008 on the relevant temporary differences at 31 December 2007 was a credit of £12 million and a further credit of £1 million in 2008. No other material amounts arose as a result of changes introduced by the Finance Act 2007. The effect of changes to foreign tax rates on the relevant temporary differences at 31 December 2008 was £nil (2007: charge of £3 million).
The tax charge comprises:            
Current tax            
UK corporation tax 398 5 403 309 – 309
UK petroleum revenue tax 517 – 517 200 – 200
Foreign tax 24 2 26 48 2 50
Adjustments in respect of prior years (20) – (20) 4 – 4
Total current tax 919 7 926 561 2 563
Deferred tax            
Current year(i) 165 (236) (71) 253 53 306
Adjustments in respect of prior years (8) – (8) (19) – (19)
Change in tax rates(ii) (1) – (1) (9) – (9)
UK petroleum revenue tax (52) – (52) (32) – (32)
Foreign deferred tax 4 (205) (201) (1) 5 4
Total deferred tax 108 (441) (333) 192 58 250
Total tax on profit from continuing operations 1,027 (434) 593 753 60 813

Tax on items taken directly to equity is disclosed in note 30.

The Group earns its profits primarily in the UK, therefore the tax rate used for tax on profit on ordinary activities is the standard rate for UK corporation tax, which was 28.5% for 2008 (2007: 30%). Additional charges of 21.5% (2007: 20%) are applicable on the Group’s UK upstream profits. Taxation for other jurisdictions is calculated at the rates prevailing in those respective jurisdictions.

(b) Factors affecting the tax charge for the year

The differences between the total tax shown above and the amount calculated by applying the standard rate of UK corporation tax to the profit before tax is as follows:

  2008 2007
  Results for the year before exceptional items and certain re-measurements
£m
Exceptional items and certain re-measurements
£m
Results for the year
£m
Results for the year before exceptional items and certain re-measurements
£m
Exceptional items and certain re-measurements
£m
Results for the year
£m
  1. The movement in unrecognised deferred tax assets includes the recognition in 2008 of £55 million of deferred tax assets relating to certain decommissioning provisions, following changes to UK tax law, and non-recognition of losses in certain overseas subsidiaries.
Profit from continuing operations before tax 1,931 (1,482) 449 1,876 235 2,111
Less: share of profits in joint ventures and associates, net of interest and taxation (16) 4 (12) (14) 9 (5)
Group profit from continuing operations before tax 1,915 (1,478) 437 1,862 244 2,106
Tax on profit from continuing operations at standard UK corporation tax rate of 28.5% (2007: 30%) 546 (421) 125 559 73 632
Effects of:            
Net expenses not deductible for tax purposes 48 13 61 11 – 11
Adjustments in respect of prior years (28) – (28) (15) (15) (30)
Movement in unrecognised deferred tax assets(i) (31) 6 (25) 16 – 16
UK petroleum revenue tax rates 335 – 335 118 – 118
Overseas tax rates (8) (46) (54) 8 5 13
Additional charges applicable to upstream profits 166 10 176 65 (3) 62
Changes to tax rates (1) 4 3 (9) – (9)
Taxation on profit from continuing operations 1,027 (434) 593 753 60 813

(c) Factors that may affect future tax charges

The Group earns income from many activities, including oil and gas production in the UK, North America and elsewhere. On average, the Group pays taxes at higher rates than the current UK statutory rate of 28% (2007: 30%). The impact of higher rates, including petroleum revenue tax and the supplementary charge on UK Continental Shelf profits, is subject to the mix of the Group’s income. In the medium term, the Group’s effective tax rate is expected to remain above the UK statutory rate.

12. DIVIDENDS

  2008
£m
2007
£m
Prior year final dividend of 8.59 pence (2007: 7.12 pence) per ordinary share 356 294
Interim dividend of 3.47 pence (2007: 2.98 pence) per ordinary share 144 123
  500 417

The prior year final dividend was paid on 11 June 2008 (2007: 13 June). The interim dividend was paid on 12 November 2008 (2007: 14 November). The prior year final dividend of 9.65 pence (2007: 8.00 pence) per ordinary share and interim dividend of 3.90 pence (2007: 3.35 pence) per ordinary share have been adjusted to reflect the bonus element of the Rights Issue in the table above. Details of the Rights Issue are provided in notes 5, 29 and 30.

The Directors propose a final dividend of 8.73 pence per ordinary share (totalling £446 million) for the year ended 31 December 2008. The dividend will be submitted for formal approval at the Annual General Meeting to be held on 11 May 2009. These Financial Statements do not reflect this dividend payable, which will be accounted for in shareholders’ equity as an appropriation of retained earnings in the year ending 31 December 2009.

13. EARNINGS PER ORDINARY SHARE

Basic earnings per ordinary share has been calculated by dividing the loss attributable to equity holders of the Company for the year of £145 million (2007: earnings of £1,505 million) by the weighted average number of ordinary shares in issue during the year of 4,198 million (2007: 4,126 million). The weighted average number of ordinary shares outstanding and the dilutive impact for both periods presented has been adjusted to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 5, 29 and 30. The Directors believe that the presentation of adjusted basic earnings per ordinary share, being the basic earnings per ordinary share adjusted for certain re-measurements and exceptional items, assists with understanding the underlying performance of the Group. The reconciliation of basic to adjusted basic earnings per ordinary share is as follows:

  2008 2007 (restated)(i)
(a) Continuing and discontinued operations £m Pence per ordinary share £m Pence per ordinary share
(Loss)/earnings – basic (145) (3.5) 1,505 36.5
Net exceptional items after tax (notes 2 and 8) 67 1.6 (227) (5.5)
Certain re-measurement losses and (gains) after tax (notes 2 and 8) 981 23.4 (156) (3.8)
Earnings – adjusted basic 903 21.5 1,122 27.2
         
(Loss)/earnings – diluted (145) (3.5) 1,505 35.9
         
Earnings – adjusted diluted 903 21.3 1,122 26.7
  2008 2007 (restated)(i)
(b) Continuing operations £m Pence per ordinary share £m Pence per ordinary share
  1. Restated to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 5, 29 and 30.
(Loss)/earnings – basic (145) (3.5) 1,296 31.4
Net exceptional items after tax (notes 2 and 8) 67 1.6 – –
Certain re-measurement losses and (gains) after tax (notes 2 and 8) 981 23.4 (175) (4.2)
Earnings – adjusted basic 903 21.5 1,121 27.2
         
(Loss)/earnings – diluted (145) (3.5) 1,296 30.9
         
Earnings – adjusted diluted 903 21.3 1,121 26.7
  2008 2007 (restated)(i)
(c) Discontinued operations £m Pence per ordinary share £m Pence per ordinary share
  1. Restated to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 5, 29 and 30.
Earnings – basic – – 209 5.1
Earnings – diluted – – 209 5.0

Certain re-measurements (notes 2 and 8) included within operating profit comprise re-measurements arising on energy procurement activities and re-measurement of proprietary trades in relation to cross-border transportation or capacity contracts. Certain re-measurements included within discontinued operations in 2007 comprise re-measurement of the publicly traded units of The Consumers’ Waterheater Income Fund. All other re-measurements are included within results before exceptional items and certain re-measurements.

In addition to basic and adjusted basic earnings per ordinary share, information is presented for diluted and adjusted diluted earnings per ordinary share. Under this presentation, no adjustments are made to the reported earnings for either 2008 or 2007, however the weighted average number of shares used as the denominator is adjusted for potentially dilutive ordinary shares. In 2008, no outstanding awards or options are considered to be potentially dilutive for diluted earnings per ordinary share, because doing so would decrease the loss per ordinary share. However, potentially dilutive ordinary shares were taken into account when calculating adjusted diluted earnings per ordinary share.

  2008 million shares 2007 (restated)(i) million shares
  1. Restated to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 5, 29 and 30.
Weighted average number of shares used in the calculation of basic earnings per ordinary share 4,198 4,126
Dilutive impact of share-based payment schemes 35 71
Weighted average number of shares used in the calculation of diluted earnings per ordinary share 4,233 4,197

14. GOODWILL

  2008
£m
2007
£m
Cost and net book value    
1 January 1,074 1,055
Acquisitions (note 35) 269 58
Adjustments to provisional fair values of acquisitions completed in previous year 2 –
Impairment (note 16) (45) –
Disposals – (124)
Exchange adjustments 210 85
31 December 1,510 1,074
Analysis of goodwill at 31 December by acquisition 2008
£m
2007
£m
Direct Energy 369 335
Energy America 31 23
Enron Direct/Electricity Direct 133 133
Enbridge Services 87 79
CPL/WTU 253 186
ATCO 51 46
Dyno-Rod 17 17
Residential Services Group 92 67
Oxxio 69 90
Newfield 57 55
Strategic Energy 104 –
Caythorpe 33 –
Heimdal 151 –
Other 63 43
  1,510 1,074
  Application software
£m
Emissions allowances and renewable obligation certificates Brands(i)
£m
Customer relationships
£m
Consents
£m
Exploration and evaluation expenditure
£m
Other
£m
Total
£m
Cost                
1 January 2008 447 53 57 72 29 41 44 743
Additions – acquired from a third party 57 249 – 14 – 16 1 337
Additions – internally generated 2 – – – – – – 2
Acquisitions (note 35) – – 2 20 – 54 – 76
Disposals – (9) – (18) – – – (27)
Surrenders – (100) – – – – – (100)
Write-downs recognised in income(ii) – – – – – (22) – (22)
Exchange adjustments 15 – – 20 – 8 1 44
31 December 2008 521 193 59 108 29 97 46 1,053
Aggregate amortisation and impairment                
1 January 2008 214 – – 32 – – 32 278
Amortisation 58 – – 14 2 – 2 76
Impairment recognised in income(iii) – 31 – – – – – 31
Disposals – – – (18) – – – (18)
Exchange adjustments 6 – – 9 – – – 15
31 December 2008 278 31 – 37 2 – 34 382
Net book value at 31 December 2008 243 162 59 71 27 97 12 671
  Application software
£m
Renewable obligation certificates
£m
Brands(i)
£m
Customer relationships
£m
Consents
£m
Exploration and evaluation expenditure
£m
Other
£m
Total
£m
  1. Brands include £57 million associated with the Dyno-Rod brand, acquired on the acquisition of the Dyno group of companies during 2004. In accordance with IAS 38 paragraph 88, management has ascribed the brand an indefinite useful life because there is no foreseeable limit to the period over which the Dyno brand is expected to generate net cash inflows. In reaching this determination, management has reviewed potential threats from competition, the risks of technological obsolescence and the expected usage of the brand by management.
  2. A £21 million write-down of exploration and evaluation expenditure was recognised in Gas production and development, and a £1 million write-down was recognised in the Direct Energy segment, in operating costs to reflect a reduction in the recoverable amount of certain assets to £nil, related to projects that are not commercially viable.
  3. A £31 million impairment of emissions allowances was recognised in the Power generation segment, within cost of sales, to reflect a reduction in fair value (less costs to sell) as a result of a decrease in market prices, that was partially offset by a reduction in the obligation related to emission allowances of £30m.
Cost                
1 January 2007 398 27 57 69 29 24 37 641
Additions – acquired from a third party 23 97 – – – 30 5 155
Additions – internally generated 26 – – – – – – 26
Acquisitions – – – 10 – 12 – 22
Disposals of subsidiaries – – – (9) – – (1) (10)
Disposals (11) – – – – – – (11)
Exploration and evaluation expenditure transferred to producing assets – – – – – (17) – (17)
Surrenders – (72) – – – – – (72)
Write-downs recognised in income – – – – – (13) – (13)
Exchange adjustments 11 1 – 2 – 5 3 22
31 December 2007 447 53 57 72 29 41 44 743
Aggregate amortisation and impairment                
1 January 2007 160 – – 20 – – 15 195
Amortisation 53 – – 10 – – 17 80
Disposals of subsidiaries – – – (1) – – – (1)
Disposals (6) – – – – – – (6)
Exchange adjustments 7 – – 3 – – – 10
31 December 2007 214 – – 32 – – 32 278
Net book value at 31 December 2007 233 53 57 40 29 41 12 465

16. IMPAIRMENT TESTING OF GOODWILL AND INTANGIBLES WITH INDEFINITE USEFUL LIVES

(a) Carrying amount of goodwill and intangible assets with indefinite useful lives allocated to cash-generating units

Goodwill acquired through business combinations and indefinite lived intangible assets have been allocated for impairment testing purposes to individual cash-generating units each representing the lowest level within the Group at which the goodwill or indefinite lived intangible asset is monitored for internal management purposes as follows:

    2008 2007
Cash-generating unit Principal acquisitions to which goodwill and intangibles with indefinite useful lives relates Carrying amount of goodwill
£m
Carrying amount of indefinite lived intangible asset
£m
Total
£m
Carrying amount of goodwill
£m
Carrying amount of indefinite lived intangible asset
£m
Total
£m
  1. During the year, the aggregation of assets in determining the cash-generating units for Direct Energy changed in line with the restructuring of the business into four pan-North American lines of business. Direct Energy – Mass markets energy combines Canada mass markets, US North mass markets, Texas Direct mass markets and Texas residential energy, Direct Energy – Commercial and industrial energy combines Canada commercial and industrial, US North commercial and industrial and Texas commercial and industrial, and Direct Energy – Home and business services combines Canada home services, US home services, Canada business services and US business services. Comparative figures have been restated to reflect the change in the allocation of goodwill to cash-generating units.
  2. Carrying amount of goodwill also contains goodwill from other Direct Energy acquisitions which are not significant compared with the aggregate carrying value of goodwill reported within the cash-generating unit.
  3. Goodwill balances allocated across multiple cash-generating units. The amount of goodwill allocated to each cash-generating unit is not significant compared with the aggregate carrying value of goodwill reported within the Group.
British Gas Business Enron Direct/Electricity Direct 133 – 133 133 – 133
British Gas Services – Dyno-Rod Dyno-Rod 17 57 74 17 57 74
Centrica Energy – Gas production and development Newfield/Heimdal 208 – 208 55 – 55
Direct Energy – Mass markets energy(i) Direct Energy/ATCO/CPL/WTU(ii) 612 – 612 506 – 506
Direct Energy – Commercial and industrial energy(i) Direct Energy/ATCO/Strategic Energy(ii) 196 – 196 83 – 83
Direct Energy – Home and business services(i) Enbridge Services/Residential Services Group(ii) 200 – 200 158 – 158
European Energy – Oxxio Oxxio 69 – 69 90 – 90
Other(iii) Various(iii) 75 – 75 32 – 32
    1,510 57 1,567 1,074 57 1,131

(b) Basis on which recoverable amount has been determined

Value in use calculations have been used to determine recoverable amounts for all of the goodwill and indefinite lived intangible asset balances noted above, with the exception of the impairment test for the Centrica Energy – Gas production and development cash-generating unit, where fair value less costs to sell has been used as the basis for determining recoverable amount.

(i) Value in use

The value in use calculations use cash flow projections based on the Group’s internal Board-approved three-year business plans. The Group’s business plans are based on past experience and adjusted to reflect market trends, economic conditions, key risks, the implementation of strategic objectives and changes in commodity prices, as appropriate. Commodity prices used in the planning process are based in part on observable market data and in part on internal estimates. The extent to which the commodity prices used in the business plans are based on observable market data is determined by the extent to which the market for the underlying commodity is judged to be active. Note 28 provides additional detail on the active period of each of the commodity markets in which the Group operates.

Cash flows beyond the three-year plan period have been extrapolated using growth rates in line with historic long-term growth rates in the market where the cash-generating unit operates.

Cash flows are discounted using a discount rate specific to each cash-generating unit to determine the cash-generating unit’s value in use, which is then deemed to be its recoverable amount. The recoverable amount is compared to the carrying value of each cash-generating unit’s net assets to determine whether the carrying values of any of the Group’s goodwill or indefinite lived intangible asset balances are greater than their corresponding recoverable amounts.

(ii) Fair value less costs to sell

Fair value less costs to sell is used as the basis for determining the recoverable amount of goodwill allocated to Centrica Energy – Gas production and development. This methodology is deemed to be more appropriate because it is based on the post-tax cash flows arising from each field within Centrica Energy – Gas production and development, which is consistent with the approach taken by management to evaluate the economic value of the underlying assets.

Fair value less costs to sell is determined by discounting the post-tax cash flows expected to be generated by the gas production and development assets within Centrica Energy – Gas production and development, net of associated selling costs, taking into account those assumptions that market participants would use in estimating fair value. Post-tax cash flows are derived from projected production profiles of each field within Centrica Energy – Gas production and development, taking into account forward prices for gas and liquids over the relevant period. Where forward market prices are not available, prices are determined based on internal model inputs. Note 28 provides additional detail on the active period of each of the commodity markets in which the Group operates.

The date of cessation of production depends on the interaction of a number of variables, such as the recoverable quantities of hydrocarbons, the production costs, the contractual duration of the licence area and the selling price of the gas and liquids produced. As each field has specific reservoir characteristics and economic circumstances, the post-tax cash flows for each field are computed using individual economic models and key assumptions as determined by management. Post-tax cash flows used in the fair value less costs to sell calculation for the first three years are based on the Group’s internal Board-approved three-year business plans and, thereafter, are forecast on a consistent basis. The future post-tax cash flows are discounted using a post-tax nominal discount rate of 8.5% to determine the fair value less costs to sell of Centrica Energy – Gas production and development. Fair value less costs to sell is compared to the carrying value of the Centrica Energy – Gas production and development cash-generating unit to determine whether goodwill is impaired. The discount rate used in the fair value less costs to sell calculation is determined in the same manner as the discount rates used in the value in use calculations described below, with the exception of the adjustment required to determine an equivalent pre-tax discount rate that is not required for the fair value less costs to sell calculation.

(c) Key rates used in value in use calculations

(i) Growth rate to perpetuity

Long-term growth rates are determined using a blend of publicly available historical data and long-term growth rate forecasts published by external analysts.

(ii) Discount rates

The Group uses surrogates in an attempt to estimate a market assessment of the time value of money and the risks inherent in the Group’s business plans in order to discount the forecast cash flows of each of the Group’s cash-generating units. Discount rates are derived from the Group’s weighted average cost of capital by replacing the Group’s beta with the betas of companies comparable to each of the Group’s cash-generating units to estimate a cash-generating unit specific weighted average cost of capital. Each cash-generating unit’s specific weighted average cost of capital is then adjusted to reflect the impact of tax in order to calculate an equivalent pre-tax discount rate.

Long-term growth rates used in the value in use calculations for each of the Group’s cash-generating units are provided in the table below together with pre-tax discount rates.

  British Gas Business British Gas Services – Dyno-Rod Direct Energy – Mass markets energy Direct Energy – Commercial and industrial energy Direct Energy – Home and business services European Energy – Oxxio
Growth rate to perpetuity 2.0% 2.5% 1.5% 2.0% 2.0% 2.0%
Pre-tax discount rate 9.3% 9.9% 9.3% 9.3% 9.3% 10.9%

(iii) Inflation rates

Inflation rates used in the three-year business plan were based on a blend of a number of publicly available inflation forecasts available in the UK, Europe, Canada and the US. Inflation rates used for the value in use calculations were as follows: UK and Europe – 2.5% in 2009 and 2% in 2010 and 2011, Canada – 2.3% in 2009 and 2% in 2010 and 2011 and the US – 2.9% in 2009 and 2% in 2010 and 2011.

(d) Key assumptions used and summary of results

(i) British Gas Business

Key assumptions
  • Gross margin percentage: based on contractual terms for customers on existing contracts and achieved gross margin percentages in the period leading up to approval of the business plan for new and renewal customers adjusted to reflect current market conditions and higher expected transportation costs.
  • Revenues: based on the average market share achieved immediately prior to the approval of the business plan, adjusted for growth forecasts based on sales and marketing activity and recent customer acquisitions, with prices based on forward market curves for both gas and electricity.
  • Operating costs: based on a projection of headcount in line with expected activity and salary increases based on inflation expectations, with a slight increase in the provision for credit losses experienced historically to reflect the current economic environment in the UK.
Summary of results

The recoverable amount of the British Gas Business cash-generating unit exceeded its carrying value at the impairment test date. Reasonably possible changes in the key assumptions listed above would not cause the recoverable amount of the goodwill to be equal to or less than the carrying amount.

(ii) British Gas Services – Dyno-Rod

Key assumptions
  • Gross margin percentage: based on achieved gross margins in the period leading up to approval of the business plan.
  • Revenues: based on revenue levels achieved in the period leading up to approval of the business plan adjusted for the impact of increased marketing spend and the targeting of key accounts with individual sales staff, with a slight reduction in growth rates to reflect the current economic environment in the UK.
  • Operating costs: based on a projection of headcount in line with expected activity and salary increases based on inflation expectations.
Summary of results

The recoverable amount of the British Gas Services – Dyno-Rod cash-generating unit exceeded its carrying value at the impairment test date. Reasonably possible changes in the key assumptions listed above would not cause the recoverable amount of the goodwill or indefinite lived intangible asset to be equal to or less than their carrying amounts.

(iii) Centrica Energy – Gas production and development

Key assumptions
  • Cash inflows: based on forward market prices for gas and oil for the active period of the market and internal model inputs thereafter, with reserve volumes and production profiles based on internal management estimates.
  • Cash outflows: based on planned capital expenditure and the estimated future costs of abandonment.
  • Taxation: based on tax rates expected to be in effect at the point of the forecast cash flow.
Summary of results

The recoverable amount of the Centrica Energy – Gas production and development cash-generating unit exceeded its carrying value at the impairment test date. Reasonably possible changes in the key assumptions listed above would not cause the recoverable amount of the goodwill to be equal to or less than the carrying amount.

(iv) Direct Energy – Mass markets energy

Key assumptions
  • Gross margin percentage: based on contractual terms for customers on existing contracts and achieved gross margin percentages in the period leading up to approval of the business plan for new and renewal customers, adjusted to reflect competitor data, where available. Where applicable, regulated gross margin percentages are based on the gross margin percentages included in regulatory applications submitted to the Alberta Utilities Commission in Canada.
  • Revenues: based on average market share by individual market sector achieved in the period immediately prior to the approval of the business plan, adjusted for expectations of growth or decline based on individual jurisdiction to reflect regulatory or competitive differences, including customer propensity to switch, and contractual prices, with non-contractual prices based on forward market gas and power curves in Canada and the US.
  • Operating costs: based on a projection of headcount in line with expected activity and salary increases based on inflation expectations, with a slight increase in the provision for credit losses experienced historically to reflect the current negative economic environment in the US, and, to a lesser extent, Canada.
Summary of results

The recoverable amount of the Direct Energy – Mass markets energy cash-generating unit exceeded its carrying value at the impairment test date. Reasonably possible changes in the key assumptions listed above would not cause the recoverable amount of the goodwill to be equal to or less than the carrying amount.

(v) Direct Energy – Commercial and industrial energy

Key assumptions
  • Gross margin percentage: based on achieved gross margin percentages in the period leading up to approval of the business plan, increased to reflect an expected easing of competitive pressure throughout the plan period and decreased to reflect the current negative economic environment in the US, and, to a lesser extent, Canada.
  • Revenues: based on historical growth trends and planned sales activities by individual market sector with an adjustment to reflect an increase in volumes driven by the acquisition of Strategic Energy as explained in note 35. Prices are based on forward market curves for gas and electricity in Canada and the US.
  • Operating costs: based on expected increases in existing cost base to reflect increased activity as a slightly declining percentage of gross margins to reflect expected synergies associated with the acquisition of Strategic Energy as explained in note 35.
Summary of results

The recoverable amount of the Direct Energy – Commercial and industrial energy cash-generating unit exceeded its carrying value at the impairment test date. Reasonably possible changes in the key assumptions listed above would not cause the recoverable amount of the goodwill to be equal to or less than the carrying amount.

(vi) Direct Energy – Home and business services

Key assumptions
  • Gross margin percentage: based on gross margin percentages achieved in the period leading up to approval of the business plan, adjusted to reflect the current economic conditions and housing decline in North America.
  • Revenues: based on historical growth trends by individual market sector adjusted for new product offerings and continued penetration into new markets.
  • Operating costs: based on projected headcount and inflationary increases.
Summary of results

The recoverable amount of the Direct Energy – Home and business services cash-generating unit exceeded its carrying value at the impairment test date. Reasonably possible changes in the key assumptions listed above would not cause the recoverable amount of the goodwill to be equal to or less than the carrying amount.

(vii) European Energy – Oxxio

Key assumptions
  • Gross margin percentage: based on the gross margin percentages achieved in the period leading up to approval of the business plan, adjusted to reflect the increase in levels of competition currently being experienced in The Netherlands.
  • Revenues: based on customer account growth achieved in the period leading up to approval of the business plan, adjusted downward to reflect the impact of the recent increases in competition, with prices reflecting forward market curves for gas and electricity.
  • Operating costs: based on projected headcount and inflationary increases adjusted to reflect recently implemented cost improvement programmes and an increase in web enabled customer solutions.
Summary of results

The recoverable amount of the European Energy – Oxxio cash-generating unit was below its carrying value by £45 million at the impairment test date and accordingly an impairment loss of this amount has been recognised in the Income Statement for the year ended 31 December 2008 within exceptional operating costs. The impairment loss arose due to a mixture of more competitive markets and lower margins in the forecast period due to procurement issues that arose during 2008 with the increased volatility in energy markets. The European Energy – Oxxio value in use calculation was based on a discount rate of 10.9% (2007: 10.7%), and assumed an average gross margin percentage of 9.0% over the three years with closing customer numbers of approximately 750,000 in all three years. At 31 December 2008, the carrying value of the European Energy – Oxxio cash-generating unit was equal to its recoverable amount. As a result, a reasonably possible decrease in gross margin percentage or customer numbers, below the levels used in the value in use calculation above, would potentially result in the recoverable amount of the European Energy – Oxxio cash-generating unit falling below its carrying value, triggering a further impairment loss. If, for example, the value in use calculation assumed gross margin percentages 0.5ppts lower, than those used, a further goodwill impairment loss of approximately £32 million would have been recorded, while a 5% reduction in customer numbers would have resulted in an additional goodwill impairment loss of approximately £23 million.

17. PROPERTY, PLANT AND EQUIPMENT

  Land and buildings(i)
£m
Plant, equipment and vehicles(ii)
£m
Power generation(ii),(iii)
£m
Gas storage and production(ii),(iii),(iv)
£m
Total
£m
Cost          
1 January 2008 39 288 2,076 5,433 7,836
Additions – 115 312 204 631
Acquisitions (note 35) – 4 – 342 346
Disposals (18) (8) (8) – (34)
Revisions and additions to decommissioning liability (note 27) – – 16 165 181
Exchange adjustments 1 25 87 81 194
31 December 2008 22 424 2,483 6,225 9,154
Aggregate depreciation and impairment          
1 January 2008 17 121 305 3,483 3,926
Charge for the year 1 46 117 351 515
Disposals (8) (8) (7) – (23)
Exchange adjustments – 8 19 29 56
31 December 2008 10 167 434 3,863 4,474
Net book value at 31 December 2008 12 257 2,049 2,362 4,680
  Land and buildings(i)
£m
Plant, equipment and vehicles(ii)
£m
Power generation(ii),(iii)
£m
Gas storage and production(ii),(iii),(iv)
£m
Total
£m
Cost          
1 January 2007 38 648 1,732 4,860 7,278
Additions – 76 386 166 628
Exploration and evaluation expenditure transferred to producing assets – – – 17 17
Acquisitions – 10 – 244 254
Disposals of subsidiaries – (323) – – (323)
Disposals – (173) (52) (1) (226)
Revisions and additions to decommissioning liability – – 12 80 92
Exchange adjustments 1 50 (2) 67 116
31 December 2007 39 288 2,076 5,433 7,836
Aggregate depreciation and impairment          
1 January 2007 16 222 244 3,141 3,623
Charge for the year 1 75 107 311 494
Disposals of subsidiaries – (102) – – (102)
Disposals – (90) (48) – (138)
Exchange adjustments – 16 2 31 49
31 December 2007 17 121 305 3,483 3,926
Net book value at 31 December 2007 22 167 1,771 1,950 3,910
(i) The net book value of land and buildings comprises the following: 2008
£m
2007
£m
Freeholds 5 14
Long leaseholds 1 1
Short leaseholds 6 7
  12 22
(ii) Assets in the course of construction are included within the following categories of property, plant and equipment: 2008
£m
2007
£m
Plant, equipment and vehicles 33 7
Power generation 697 393
Gas storage and production 186 202
  916 602
  2008 2007
(iii) Assets held under finance leases included in totals above Power generation
£m
Gas storage and production
£m
Total
£m
Power generation
£m
Gas storage and production
£m
Total
£m
  1. The net book value of decommissioning costs included within gas storage and production assets was £413 million (2007: £209 million).
  2. Relates to the Humber Power Station that was the subject of a finance lease that was terminated in 2007.
Cost at 1 January 469 415 884 882 415 1,297
Additions – – – 4 – 4
Transferred out of assets held under finance leases(v) – – – (417) – (417)
Cost at 31 December 469 415 884 469 415 884
Aggregate depreciation at 1 January 90 352 442 89 344 433
Charge for the year 28 8 36 60 8 68
Transferred out of assets held under finance leases(v) – – – (59) – (59)
Aggregate depreciation at 31 December 118 360 478 90 352 442
Net book value at 31 December 351 55 406 379 63 442

The net book value of assets to which title was restricted (Spalding finance lease asset) at 31 December 2008 was £351 million (2007: £379 million).

18. INTERESTS IN JOINT VENTURES AND ASSOCIATES

(a) Interest in joint ventures and associates Investments in joint ventures and associates    
Investments
£m
Goodwill
£m
Shareholder loans
£m
Total
£m
1 January 2008 192 30 63 285
Decrease in shareholder loans – – (19) (19)
Share of profits for the year 12 – – 12
Exchange adjustments 52 – – 52
31 December 2008 256 30 44 330
  Investments in joint ventures and associates    
Investments
£m
Goodwill
£m
Shareholder loans
£m
Total
£m
1 January 2007 171 26 23 220
Additions 1 4 38 43
Increase in shareholder loans 2 2
Share of profits for the year 5 5
Exchange adjustments 15 15
31 December 2007 192 30 63 285

(b) Share of joint ventures’ assets and liabilities

The Group’s share of joint ventures’ gross assets and gross liabilities at 31 December 2008 principally comprises its interests in Braes of Doune Wind Farm (Scotland) Limited (renewable power generation), Barrow Offshore Wind Limited (renewable power generation) and Segebel SA (energy supply).

          2008 2007
  Braes of Doune Wind Farm (Scotland) Limited
£m
Barrow Offshore Wind Limited
£m
Segebel SA
£m
Other(i)
£m
Total
£m
Total
£m
  1. Other includes the Group’s interest in Coots (CO2 pipeline construction). The Group’s interest in Coots is not significant relative to the Group’s interests in joint ventures in aggregate.
Share of current assets 12 7 185 – 204 100
Share of non-current assets 39 64 309 – 412 350
  51 71 494 – 616 450
Share of current liabilities (24) (1) (148) – (173) (78)
Share of non-current liabilities (18) (24) (114) (1) (157) (150)
  (42) (25) (262) (1) (330) (228)
Share of net assets of joint ventures and associates 9 46 232 (1) 286 222
Shareholder loans 32 10 – 2 44 63
Interests in joint ventures and associates 41 56 232 1 330 285
             
Net (debt)/cash included in share of net assets (36) (15) 42 (2) (11) (35)
          2008 2007
(c) Share of profits/(losses) in joint ventures and associates Braes of Doune Wind Farm (Scotland) Limited
£m
Barrow Offshore Wind Limited
£m
Segebel SA
£m
Other(i)
£m
Total
£m
Total
£m
  1. Other includes the Group’s interest in Coots (CO2 pipeline construction). The Group’s interest in Coots is not significant relative to the Group’s interests in joint ventures in aggregate.
Income 10 11 496 – 517 386
Expenses (3) (5) (495) – (503) (379)
  7 6 1 – 14 7
Interest – (1) 1 – – –
Tax (2) (1) 1 – (2) (2)
Share of post-tax results of joint ventures and associates 5 4 3 – 12 5

The Group’s share of the investments in and results of Braes of Doune Wind Farm (Scotland) Limited and Barrow Offshore Wind Limited are included within the Power generation segment. The Group’s share of the investment in and results of Segebel SA are included within the European Energy segment.

19. INVENTORIES

  2008
£m
2007
£m
Gas in storage and transportation 223 134
Other raw materials and consumables 93 84
Finished goods and goods for resale 96 23
  412 241

There are no inventories which are carried at fair value less cost to sell (2007: £nil). The Group consumed £515 million of inventories (2007: £488 million) during the year. Write-downs of inventory of £23 million (2007: £nil) were recognised in gross profit during the year to reflect the impact of a reduction in the forward market price of gas on the net realisable value of gas in storage and transportation, with £10 million recognised in Direct Energy, £8 million recognised in Centrica Energy and £5 million recognised in Centrica Storage.

20. TRADE AND OTHER RECEIVABLES

  2008 2007
  Current
£m
Non-current
£m
Current
£m
Non-current
£m
Financial assets:        
Trade receivables 2,142 25 1,405 22
Accrued energy income 2,480 – 1,678 –
Cash collateral pledged 669 – 118 –
Other receivables 330 9 435 11
  5,621 34 3,636 33
Less: Provision for credit losses (541) – (431) –
  5,080 34 3,205 33
Non-financial assets:        
Prepayments and other receivables 255 – 218 –
  5,335 34 3,423 33

Trade and other receivables include financial assets representing the contractual right to receive cash or other financial assets from residential customers, business customers and treasury, trading and energy procurement counterparties as follows:

  2008 2007
  Current
£m
Non-current
£m
Current
£m
Non-current
£m
Financial assets by class:        
Residential customers 2,217 25 1,960 23
Business customers 1,651 9 802 9
Treasury, trading and energy procurement counterparties 1,753 – 874 1
  5,621 34 3,636 33
Less: Provision for credit losses (541) – (431) –
  5,080 34 3,205 33

Receivables from residential and business customers are generally considered to be fully performing until such time as the payment that is due remains outstanding past the contractual due date. Contractual due dates range from being due upon receipt to due in 30 days. An ageing of the carrying value of trade and other receivables that are past due but not considered to be individually impaired by class is as follows:

  2008 2007
Days past due Residential customers
£m
Business customers
£m
Treasury, trading and energy procurement counterparties
£m
Residential customers
£m
Business customers
£m
Treasury, trading and energy procurement counterparties
£m
Less than 30 days 299 123 5 276 55 –
30–89 days 127 141 2 174 41 –
Less than 90 days 426 264 7 450 96 –
90–182 days 89 34 – 91 47 –
183–365 days 109 51 5 98 37 –
Greater than 365 days 126 17 5 62 17 –
  750 366 17 701 197 –

At 31 December 2008 there were £107 million (2007: £87 million) of receivables, net of provisions for credit losses, from residential customers and £25 million (2007: £nil) from treasury, trading and energy procurement counterparties that were considered to be individually impaired. There were no individually impaired receivables, net of provisions for credit losses, from business customers. Receivables from residential customers are generally reviewed for impairment on an individual basis once a customer discontinues their relationship with the Group. The provision for credit losses is based on an incurred loss model and is determined by application of expected default and loss factors, determined by historical loss experience and current sampling to the various balances receivable from residential and business customers on a portfolio basis, in addition to provisions taken against individual accounts. Balances are written off when recoverability is assessed as being remote. Movements in the provision for credit losses by class are as follows:

2008 Residential customers
£m
Business customers
£m
Treasury, trading and energy procurement counterparties
£m
Total
£m
1 January (350) (81) – (431)
Impairment of trade receivables (141) (85) (11) (237)
Receivables written off 118 38 – 156
Exchange adjustments (26) (3) – (29)
31 December (399) (131) (11) (541)
2007 Residential customers
£m
Business customers
£m
Treasury, trading and energy procurement counterparties
£m
Total
£m
1 January (270) (49) – (319)
Impairment of trade receivables (132) (52) – (184)
Receivables written off 55 20 – 75
Exchange adjustments (3) – – (3)
31 December (350) (81) – (431)

The charge for the impairment of trade receivables is stated net of credits for the release of specific provisions made in previous years, relating mainly to residential customers in the UK, which are no longer required. At 31 December 2008 the Group held £23 million (2007: £36 million) of customer deposits for the purposes of mitigating the credit risk associated with receivables from residential and business customers. Exposure to credit risk associated with receivables from treasury, trading and energy procurement counterparties is monitored by counterparty credit rating as follows:

Receivables from treasury, trading and energy procurement counterparties by credit rating Carrying value
£m
AAA
£m
AA
£m
A
£m
BBB
£m
BB or lower
£m
Unrated
£m
2008 1,753 3 478 891 260 14 107
2007 875 7 189 277 129 26 247

The unrated counterparty receivables are comprised primarily of amounts due from subsidiaries of rated entities, exchanges or clearing houses. Receivables from treasury, trading and energy procurement counterparties are managed in accordance with the Group’s counterparty credit policy as described in note 4.